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South Korea SWOT Analysis

By Jeffrey J. Smith

Summary

From as early as 50 BC, Koreans have had the duty of paying for land to their government, a rent to their king. Through the millennia, the land dues went through many transformations yet nevertheless persisted until the 19th century. Then the Japanese colonized Korea and created a cadastre that more stringently identified landowners and levied upon them a land-value tax separately from taxes on property improvements.

Modern South Korea has several land taxes. The central government – which appointed all local administrators until 1995 – taxes the income stream from a property and the gains from a sale while the local government taxes registering and holding land. The taxes on land come due in the spring, on buildings in the fall. How much these property taxes contribute to the operation of local government varies widely from 30% of budget in some jurisdictions to 80% in others.

The wide range depends on two factors, one political and one economic. The economic one is simply how much land rent is available, which typically is more in urban jurisdictions and less in rural ones. The political factor is the relationship between the central government and the particular jurisdiction, how much land-based revenue the central government returns to the locality, which can be a factor of political favoritism.

We do not have any more recent information to be able to tell if localities have won greater autonomy or if either government – local or central – has increased or decreased it recovery of ground rent. We do not know how much revenue these property taxes raise compared to other taxes. Nor do we know if the taxes on land raise more revenue than the ones on buildings. Contemporary news reports tell us that there have been proposals to tax land and much discussion and dissent, which is typical when land rent lines the pockets of well-connected speculators.

Due to economic growth and land speculation, the value of Korea’s land by 1990 was nine times its GDP, a much higher ratio than experienced by other countries, including Japan. In 1989, the appreciation in the value of locations was 35% greater than the earnings of all urban workers, and most of that land value increase escaped taxation. Only 5% of the population owned 65.2% of the nation’s best land, which is in short supply as South Korea is very mountainous, like Taiwan, so most acreage is desolate.

As in many places, especially those where location value rises rapidly, for years the government did not keep assessments current. Both speculators, who tend to have more political power, and normal landowners, who tend to be very numerous, complained about higher taxes on land. Local governments did not increase land rent recovery since they were able to obtain revenue from other taxes and from the central government.

Failure to reassess land as it grows in value of course benefits most those owners of land growing fastest in value. The reform of 1989 did lead to assessments that reflected actual market value but the government vitiated that by later further lowering tax rates.

In response to the high cost of land and to the potential of a recession once the bubble bursts, the government tried to discourage speculation and land hoarding. It reinforced the registration of land titles, reformed land assessment, limited the amount of land ownable per household, and levied taxes on landholding, land development, and on land-value increments. These extra taxes were tantamount to creating higher rates for larger holdings and more valuable holdings. The various rates ranged from one tenth of a percent to five percent, presumably of the land’s selling price or capital value. The extra complexity of various rates for various uses by various owners does come with a greater administrative cost.

While government assessors did try to calculate true market value of land, the official taxable values of sites are only 15%-20% of known market price. And since the rates of most taxes on land are low, the government’s light collection of land rent did little to modify landowners’ behavior. They still speculate, amass acreage, and withhold prime sites.

The one land tax that was an exception to the pattern of leaving rates low was the one on gains from sales of idle land which came into effect when a parcel was sold; in fast growing regions, its rate was set at 50%. Since this steep rate applied only to idle land, some owners built cheap and ugly structures to avoid having their land classified as “idle”. Thus when owners sold their no longer idle land, they could still reap maximal profit. The waste of labor and materials exacerbated a shortfall of both inputs needed for construction of genuinely desired buildings, which harmed society at large.

Other landowners paid the tax on gains but had to downsize their holdings and sell off their excess in order to be able to make the tax payment. While the tax worked for society and buyers – it broke up large holdings – those owners who had to sell complained that the tax violated the principle of ability to pay. In 1995 in the Korean constitutional court they won a ruling against the tax which now is little used.

Registration of land may be unique in Korea. There the government keeps two official records for each parcel. One is economic, detailing the value of the plot, and the other is political, detailing the rights and privileges attached to the lot.

In 1997, Korea was visited by financial panic. Local banks had borrowed heavily from global lenders to gamble on real estate. When new buyers of properties could not be found and short-term loans became due, liquidity dried up. The process was repeated around the globe, culminating in many currencies of many nations being devalued and their governments taking on more debt from the IMF. To reverse the slide in land prices, the Korean government targeted and reversed many of its 1989 reforms, however mild and ineffectual they may have been. It opened tax loopholes, lifted the limit on acreage holding, and allowed foreigners to own real estate directly. The greater leeway made it easier to trade in mortgages and attracted fresh liquidity.

As a result, the new anything-goes atmosphere not only enabled a new round of speculation in real estate but also further integrated the real estate and finance sectors, and the local and global economies. As long as land rent is left out of the public treasury and kept as an object of speculation, such new integration generates risk for the Korean economy. More credit is created, which is inflationary. And it is channeled to speculators, leaving less for actual production. Further, outside investors with large pools of cash will bid up local real estate values then withdraw their investments when land prices fall, leaving Korean borrowers desperate for liquidity.

STRENGTHS

The major strength of the Korean example is it showed that both the public and government can become aware of the harmful consequences of rampant speculation in land and become moved to try to correct the situation, which is what they did with the reforms of 1989.

Additionally, despite whatever shortcomings it may have had, the 1989 package was able to direct the bureaucracy to reassess all the land of the entire nation of South Korea.

Of course, passage and implementation of the reform was made easier by the fact that Korea had a tradition of paying taxes on land and that speculation had become so rampant that it was visible to even the casual observer. Nevertheless, since speculation is universal and rapid rises in well-situated urban land is a worldwide phenomenon, it should be possible to make the connection between the problem of unaffordable land and the solution of public recovery of land rent.

WEAKNESSES

The example of South Korea has several weaknesses:

Until the 1989 reform, neither the central nor the local government kept assessments of site values current. Local government could afford to be indifferent since most of their funding came from the central government, revenue raised by taxes on other sources than land. When the central government finally did reassess land, it "paid for" the higher assessments by lowering the rates of one of their land taxes, vitiating the potential for good from the higher assessments.

The central government could at any time create a tax loophole that could upset the plans of local government.

Except for the tax on the increment of land value, both tax rates and land assessments were too low to motivate landowners to begin to use their land more efficiently. Owners would still speculate, amass acreage, and withhold prime sites. Because there was little socially-beneficial response by owners, there is no economic data to show the before-and-after effects of this potentially powerful tool for countering speculation and promoting efficient land use.

The new tax reform of 1989 was complex in having several rates which is more difficult and hence more costly to administer.

The new tax reform of 1989, while re-organizing the land tax code and raising some rates, did not at the same time lower any other taxes, which would have made the reform more acceptable.

The proponents of the tax reform of 1989 justified its passage on the grounds as an antidote to speculation, not as an instrument of justice or a way to raise revenue or motivate efficient land use. Then later when many speculators went bust in 1997, no antidote to land speculation was any longer needed, so opponents of public recovery of ground rent were able to sweep away the justification for the land tax and reverse the reform package itself.

The unique if not odd Korean system of two official books of land assessments is not only complex but also incomplete, out-of-date, and open to manipulation.

The exemption from taxation provided to idle land shows the risk inherent in all exemptions. It motivated wasteful behavior on the part of those who took advantage of it and bitterness from those who did or could not take advantage of it. A better way to take any sting out of a tax on land would not be to exempt any owners but to return some portion of the revenue raised from ground rent as a dividend to area residents. Receiving a dividend, owners could choose to either use the funds to pay the tax and not modify their use of land or modify their use, thereby saving money, plus have the dividend as a bonus. To maximize profit - which, after all, is the point of much ownership of land - most owners would modify their use of land and put it to higher and better use or sell to someone else who would.

OPPORTUNITIES

Because Korea has a tradition of paying land dues and land taxes, and because a reform package that included taxes on land was possible as recently as two decades ago, the political climate continues to leave the possibility open of reforming land taxes again. Indeed, there is a movement in South Korea to do just that, and those activists have been able to gain the ear of certain high-ranking government officials on occasion.

Because South Korea is one of the Asian Tigers and those nations that developed so rapidly are admired worldwide, any land reform that Korea can pass should be exportable as a model to other nations aspiring to develop, too.

Because many Koreans try to get rich in real estate, and many normal owners have most of their savings in their property, the national mindset is to derive an income stream from land. As in most countries, they hope to realize that income individually. However, Koreans do have a stronger national identity with the land of their country and a tradition of paying land dues. Therefore, the proposal of a rent dividend to Koreans might be able to find some support and make land reform – accurate assessments, higher rates – far more palatable to Korean voters.

Note that the argument that overturned the one land tax with an effective rate was the ability to pay argument. However, if citizens receive a dividend from recovered rents, then they are effectively guaranteed a perpetual ability to pay the tax upon at least the land they own for living on. Receiving the dividend check each month or each year, nor do they have to wait to sell their family land to derive an income. Plus, they can use the citizens’ dividend to invest in other enterprises, if they so desire, that are not purely speculative but produce real value in terms of new goods and services, which spreads prosperity to even more Koreans.

THREATS

The South Korean model shows how a crash in inflated real estate values can be used as an excuse to overturn reform, even though doing so actually makes the next crash more likely and more devastating. The only antidote seems to be to, yes, allow the people to profit from land but not in a competitive, counterproductive, speculative fashion of individual, dog-eat-dog efforts to grab all the land rent one can for oneself but to profit together, equally, by paying land taxes or land dues into the public treasury and getting rent dividends or a "Citizens' Dividend" back.

Since the South Korean government has already backed away from its own land reform in the wake to their 1997 financial crisis, the worst that could happen already has happened. After millennia of paying land dues, to completely repeal land taxes does not seem like a credible threat.

The other main threat – turning Korean real estate into a commodity, an object of speculation in the international market via the bundling of mortgages – that, too, has already occurred.

The biggest threat may the average landowner who has no other equity but that in his land. While he torn between levying an antidote to speculation and fulfilling traditional obligations on one hand, on the other hand is the model of what most of the rest of the world is doing and that is playing a game of musical chairs with land, driving a huge gap between rich and poor, putting economies on a roller coaster ride of boom and bust. When one looks at the big picture and the threats from individuating the stream of rent for land by hoarding and by leverage (indebted borrowing), then the wholesome alternative of recovering natural rents – while not taxing the goods and services that people do produce – is clearly the way to go.

This SWOT analysis was written by Jeffery Smith, founder of the Geonomics Society, for use by the UN Habitat Global Land Tool Network’s program on land rights and land value capture. In addition to the references contained within this report, information was gleaned from the South Korea section of the book Land Value Taxation Around the World, an anthology compiled by Robert Andelson and available from the Robert Schalkenbach Foundation.

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